Advertising strategy and channel structure selection on an online retail platform
| DOI | https://doi.org/10.1108/IMDS-07-2022-0406 |
| Published date | 28 February 2023 |
| Date | 28 February 2023 |
| Pages | 1359-1400 |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
| Author | Daibing Wang,Shulin Liu |
Advertising strategy and channel
structure selection on an online
retail platform
Daibing Wang and Shulin Liu
School of Management, Xi’an Jiaotong University, Xi’an, China
Abstract
Purpose –This paper considers a supply chain with a manufacturer (she) selling through an online retail
platform (he) and studies the channel structure choices of two firms when investing in advertising.
Design/methodology/approach–The authors assume that the platformprovides the manufacturer with an
agency and/or reselling channel; thus, there are three possible channel structures: agency channel, reselling
channel and dual channel. By developing a game-theoretic model, the authors investigate the channel structure
choices of two firms when advertising separately, simultaneously and cooperatively and analyze the optimal
combination strategy of channel structure and advertising scheme for both firms.
Findings –When the advertising efforts of the two firms are independent of each other, the equilibrium results
show that different advertising schemes lead to differentchannel choices. For the manufacturer, it is optimal to
choose the dual channel structure and adopt the advertising scheme that both subsidizes platform advertising
and advertises on her own. For the platform, this combination is also optimal at a high commission rate;
otherwise, the advertising scheme in which both firms advertise simultaneously is optimal and he is better off
switching from the dual channel structure to the reselling channel structure as interchannel substitution
intensity increases. The above results still hold for complementary advertising efforts and asymmetric
marginal advertising costs, while in the case of substitutable advertising efforts, one firm may ride on another
firm’s advertising efforts, leading to different strategic combinations.
Originality/value –This paper not only provides useful guidance for manufacturers and platforms in channel
selectionand advertising strategy, but also theoreticallyenriches the literatureon manufacturer encroachment.
Keywords Online retail platform, Channel structure, Advertising, Manufacturer encroachment, Dual channel
structure, Game theory
Paper type Research paper
1. Introduction
The global explosion of coronavirus disease 2019 (COVID-19) has reshaped the way
people consume, driving the rapid growth in online consumption. According to a recent report,
global online retail sales grew by 32%, to $2.6 trillion, in 2020 and are expected to account for 20%
of total retail sales by 2025 (EIU, 2021). To expand the online market, many manufacturers have
chosen to sell through online retail platforms. In addition to offering manufacturers traditional
reselling channels, where products are purchased from manufacturers and resold to consumers,
platforms can also offer agency channels that allow manufacturers to sell directly to consumers
and receive commissions. Some online retail platforms, such as Vipshop, offer only reselling
channels; other platforms, such as eBay and Wish, offer only agency channels; and quite a few
other platforms, such as Amazon and JD.com, offer both channels. Moreover, Taobao initially
offered only agency channels but, in recent years, has launched its own business through Tmall
Supermarket and Tmall International Import Supermarket. Differences in channel selection exist
between not only platforms but also manufacturers. For example, at Jingdong Mall, L’Oreal,
Siemens and Midea have both official flagship stores (i.e. agency channels) and JD self-operated
stores (i.e. reselling channels), while Wyeth, Apple and Nike have only JD self-operated stores.
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The authors are grateful for the relentless assistance of co-editor and valuable comments from
anonymous reviewers, that help us refine the content of this article.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 4 July 2022
Revised 18 October 2022
20 December 2022
Accepted 7 January 2023
Industrial Management & Data
Systems
Vol. 123 No. 5, 2023
pp. 1359-1400
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-07-2022-0406
In addition, to boost online demand, both manufacturers and online retail platforms have
increased their advertising efforts. According to eMarketer (2022), total advertising spending
on e-commerce channels alone in the U.S. will increase by 29% in 2022 and is expected to
reach $73.02 billion by 2026. The literature generally agrees that manufacturers’advertising
is at the national level, allowing them to build brand image and increase brand awareness,
while retailers’advertising is considered to be at the local level, allowing them to convey
product promotional messages (Herrington and Dempsey, 2005). Given the different utilities
of these two types of advertising, manufacturers and retailers often advertise simultaneously.
In addition, in recent years, it has become increasingly common for manufacturers and
platforms to collaborate on advertising (Aust and Buscher, 2014;Jørgensen and Zaccour,
2014). For example, streaming video advertisements for Samsung phones also display the
Taobao logo and Siemens’s infomercial inserts link to JD.com.
Then, how should manufacturers and platforms choose their channel structure when
investing in advertising and are there differences in the choice of channel structure under
different advertising schemes? What is the optimal combination of channel structure and
advertising scheme for manufacturers and platforms? Should manufacturers encroach on the
market through the platform’s agency channel and how would such an approach differ from
encroaching through their own direct sales channels?
To answer the above questions, we consider a supply chain with a manufacturer selling a
product through an online retail platform. The platform can offer both agency and reselling
channels,so there are three possible channelstructures: agencychannel (StructureA), reselling
channel(Structure R) and dual channel(Structure D). In addition, the followingfive advertising
schemes depending on who is responsible for advertising and whether cooperation exists are
considered: manufacturer advertising (MA ), online retail platform advertising (OA),
simultaneous advertising (SA), cooperative advertising (CA) and extended CA (EA), where
the manufacturer both subsidizes platform advertising and advertises on her own.
We assume that the advertising efforts of the two firms are independent of each other. By
solving for the equilibrium decisions and revenues of the two firms under each advertising
scheme, we first reveal that Structure A is not optimal for either firm except in the extreme
case where the agency and reselling channels are completely substitutable. Second, for the
manufacturer, selling through both channels raises the total demand for her product (i.e. the
total demand expansion effect) on the one hand and leads to a lower wholesale price in
the reselling channel (i.e. the wholesale price effect) on the other hand, which can be mitigated
or even avoided by her advertising or subsidy capabilities. In addition, the potential demand
generated by different advertising schemes (i.e. the market expansion effect) varies across
channel structures. The tradeoff between these multiple factors leads the manufacturer to
choose Structure D in most cases, except under the OA scheme, where she chooses Structure
R when the commission rate is low and interchannel substitution intensity is high. Third, for
the platform, while selling through both channels generates multiple revenue streams and
allows him to potentially enjoy a lower wholesale price, there is also a risk that demand from
the reselling channel is poached by the agency channel (i.e. the demand cannibalization
effect). This effect, together with the tradeoff with the market expansion effect and subsidies,
leads him to choose Structure D when interchannel substitution intensity is low or the
commission rates under the MA and EA schemes are high and Structure R otherwise.
The above findingsreflect that when the manufacturercan afford to advertise or indirectly
control advertising through subsidies,it is always advantageous for her to encroachthrough
the agency channel. However, when potential demand is available only through platform
advertising,the manufacturer is better off refraining from encroachment at a low commission
rate and high substitution intensity. Furthermore, contrary to the conventional view that
manufacturer encroachment negatively affects retailers, when advertising is taken into
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account, the platform is able to benefit from manufacturer encroachment at low substitution
intensity or at a high commission rate under the MA and EA schemes.
By comparing the maximum revenues of the manufacturer and platform under each
advertising scheme separately, we find that the combination of Structure D and the EA
scheme is optimal for the manufacturer. This combination is also optimal for the platform at a
high commission rate. However, at a low commission rate, the SA scheme is the optimal
advertising scheme for the platform. Moreover, as interchannel substitution intensity
increases, the platform is better off shifting from Structure D to Structure R.
We also extend the model to two other cases: (1) the advertising efforts of the two firms are
complements and substitutes and (2) the marginal advertising costs of the two firms are
asymmetric. The results in (1) show that the main findings of the base case remain valid for
complementary advertising efforts. However, in the case of substitute advertising efforts, when the
marginal advertising cost is low, one firm may ride on another firm’s advertising efforts, resulting
in a change in the optimal strategic combination. For the manufacturer, the combination of
Structure D and the CA scheme is more likely to be optimal when the commission rate is high and
interchannel substitution intensity is low. For the platform, the combination of Structure D and the
OA scheme is more likely to be optimal when both the commission rate and interchannel
substitution intensity are low, while the combination of Structure D and the MA scheme is more
likely to be optimal when the commission rate is high. The results in (2) show that asymmetric
marginal advertising costs affect the equilibrium channel structure choice of two firms when they
advertise simultaneously, but do not affect their optimal combination strategy.
The remainder of this paper is organized as follows. Section 2 reviews the relevant
literature. Section 3 describes the model and assumptions. Section 4 presents the equilibrium
analysis under each advertising scheme, which in turn yields the optimal combination of
channel structure and advertising scheme in Section 5.Section 6 extends the model to the case
where the advertising efforts of two firms are complements and substitutes and where
marginal advertising costs are asymmetric. Finally, Section 7 concludes the paper. The
relevant proofs are given in Appendix 1.
2. Literature review
This study is closely related to the literature on the channel structure of online retail platforms.
Most of the existing literature assumes that manufacturers sell through either the platform’s
agency or reselling channel (Abhishek et al., 2016;Kwark et al., 2017;Geng et al., 2018;Tian et al.,
2018;Yan et al., 2018) and only a few studies consider the case where manufacturers sell through
both channels on the same platform. For example, Shi et al. (2020) reveal the risks faced by online
resale retailers when introducing agency channels. Ha et al. (2022a) examine a manufacturer’s
encroachment decision through the agency channel in the presence of an existing reselling channel
on the same platform. Luo et al. (2022) explore how a manufacturer’s channel choice is influenced
by product quality when selling through a platform. Ha et al. (2022b) investigate the channel
selection of a manufacturer and an online retail platform when the latter engages in service efforts
to increase demand and derive those conditions under which a dual-channel structure emerges in
equilibrium. We also consider the case of dual-channel sales and examine the channel choice of the
manufacturer and online retail platform under different advertising schemes. Although
advertising also aims to increase demand, unlike Ha et al. (2022b), who assume that agency
and reselling channels are fully substitutable, we investigate the impact of interchannel
substitution intensity on the equilibrium channel structure of online retail platforms. As a result,
different managerial insights are presented.
Our study also relates to the literature on advertising strategies in dual-channel supply
chains. In this literature, regarding the two channels of a dual-channel supply chain, it is
typically assumed that one is provided by a manufacturer and one by a retailer, or by two
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